Technical indicators seen as bullish for clean energy, tech and overseas funds

MurrayColeman

A safe way to do so, several said, centers on using exchange-traded funds, which can be traded like stocks. At the same time, they aren't quite as prone to market gyrations as dealing with individual stocks.

Sam Stovall, chief investment strategist at Standard & Poor's equity research services group, oversees an ETF portfolio he recommends for investors who want to avoid the risks of picking one stock at a time.

While much of his all-ETF portfolio is developed using fundamental analysis, Stovall also relies on technical analysis. In periods when markets are prone to abrupt shifts in direction, he says looking at trends in price movement can be a key tool in a manager's arsenal.

"The technical tea leaves indicate that volatility is picking up in this market cycle," Stovall said. "We wouldn't be surprised to see another pullback on the S&P 500 to the 1,360 area."

That would be a retest of the blue chip index's late-February decline. The S&P 500 closed Tuesday at 1,455.27.

"If we successfully retest those lows and don't fall any lower, then we would feel fairly confident that investors can breathe a sigh of relief that this stock market decline has run its course," Stovall added.

If the S&P 500 falls below 1,455, the next level to be concerned about would be around 1,325, Stovall says, as it would represent almost a 15% decline from the index's high on July 19 at 1,553.

Still, that wouldn't be enough to land in bear market territory. "We'd need a 20% or more correction to below 1,242 for that to happen," Stovall said.

With business and economic fundamentals still looking strong, he argues that a typical investor should shy away from any temptation at drastic portfolio changes and remain vigilant until clearer signs develop.

Stovall is sticking with a plan using ETFs created earlier this year. It calls for 40% of a portfolio's total assets to be invested in U.S. stock funds. Those are broken up to include some 34% in the SPDR S&P 500
SPY, +0.28%
Another 25% is devoted to international ETFs. The biggest part of that chunk is 17% in iShares MSCI EAFE Index ETF
EFA, +0.05%

Stovall also is recommending that an average investor put 10% into cash and 25% into bond funds. Those assets are split between 20% in iShares Lehman Bond Index ETF
AGG, -0.14%
and 5% in iShares 1-3 Year Treasury Bond Index ETF
SHY, +0.00%

"We're suggesting that a typical investor avoid chasing markets hoping for substantial advances in the short term," Stovall said. "But at the same time, don't lose your nerve and sell near the lows. Right now, it feels as if the worst is over."

Like Stovall, Lerner combines technical and fundamental analysis to make his choices.

"Over 50% of the blue chip tech sector's revenue is coming now from overseas, which should provide another level of support if growth in the U.S. slows," Lerner said. "And on a median basis, the S&P 500's technology sector is expected to produce earnings growth of 15% this year and 19% in 2008."

The SPDR in the firm's model portfolio mirrors the movement of the S&P 500 Index, which is outpacing the broader market for the first time since 2003.

The ETF is trading around $25.92 a share now and has gained more than 10% this year. Last week, the fund lost slightly more than 4 percentage points - nearly 1 percentage points less than the overall market.

"At this point, the technical trends are still positive. The ETF is currently testing its 50-day moving average," Lerner said.

If the fund's price dropped below $25 per share, he added: "We'd place a yellow flag on it, but not a red flag."

The ETF tracking consumer goods is a smaller position in Lerner's portfolio. "We see it as a hedge in case volatility picks up even more in the market," he said. "It's a defensive position that we're using in a minor role at this point."

Clean energy is a sector that Deron Wagner, president at Morpheus Capital LP, is watching closely. The hedge fund manager says he hasn't invested yet in an ETF following that segment. When markets reach a definite short-term bottom, Wagner believes PowerShares WilderHill Clean Energy ETF
PBW, +0.81%
is well-positioned to outpace the broader market.

It also fell less than the S&P 500 in the past week's correction. And the ETF is holding well above its 50-day moving average, a key short-term support level. "If it breaks below $20.50, then we'd wait a few weeks for signs it has stabilized," Wagner said.

At the same time, he's waiting to see more upside movement before jumping in. "We're looking for more confirmation," said Wagner, a technical-focused manager.

He'd consider $22.25 a share as a good entry point for the PowerShares ETF, which closed Tuesday at $21.37. "But only if it stays in a tight trading range and consolidates its gains for a few days," Wagner added. "If it moves up too quickly, we'd be wary of getting sucked into dead cat bounce."

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